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Saturday, October 08, 2005

IPO - Shree Renuka Sugars


Not so sweet
 
Financials boosted by acquisition of unit on lease and processing of imported raw sugar

Shri Renuka Sugars, promoted by Narendra Murukumbi and his family members, is a fully integrated sugar company. Co-products like power generation and ethanol are additional sources of revenue, besides sugar. The company has currently two units, one in Munoli (Karnatka) and another in Ajara (Maharashtra). The Munoli unit, equipped with a 2,500-tonne crushing per day (TCD) capacity, also processes raw sugar. The Ajara unit, too, has a 2,500-TCD capacity. It was acquired on lease for two years, starting from FY 2004.

Shri Renuka Sugars has a track record of acquiring units, either on ownership or on lease. It claims to be the largest raw sugar refiner in India (with a capacity of 1,000 TPD). The company has leased a co-operative sugar mill at Sangli (Mahrashtra) for six year, starting from FY 2006.

The debut issue is proposed to finance the expansion of the cane-crushing capacity at Munoli, from the existing 2,500 TCD to 7,500 TCD; increasing the distilling capacity to 120 kilo litres per day (KLPD), from 60 KLPD, at Munoli; setting up a new 120-KLPD unit at Sangli, taking the distilling capacity to 240 KLPD; putting up a 15-MW co-generation power plant at Sangli; increasing the co-generation capacity to 35.5 MW; and repayment of existing debt of Rs 9.86 crore.

The total project costs is estimated at Rs 138.36 crore, of which Rs 38.36 crore will be financed through internal accruals and the remaining through the present issue.

The commercial production at the Munoli expansion is expected to start from December 2006. Commercial production of the ethanol expansion is scheduled to start from October 2006. The 120-KLPD distillery at Sangli will run from December 2006 and co-gen power at the same location is scheduled to start from November 2006.

Strengths

Shri Renuka Sugars has a fully integrated sugar plant at Munoli, which gives value addition to the bottom line. The company has been able to secure 10.2% and 11.4% recovery at its Muloni and Ajara units in the current season as compared to the industry average of around 10.1%.

In the recent past, the company has been aggressively acquiring existing units and, in a short span, it has enhanced its capacities substantially. The acquisition strategy may result in an accelerated growth in revenue — specially when sugar prices are high.

Most of the sales of the company are institutional and, therefore, insulated from temporary fluctuations in domestic prices.

The company consumes around 50% of its co-generated power at its plants and, therefore, has considerable exportable surplus. This also provides an opportunity to earn carbon credits. (It has got approval for the same, and can get maximum 22,000 CER/year.)

Weaknesses

Shri Renuka Sugars owns only one unit at Munoli. The another unit at Ajara was acquired on lease in 2004 for two years. The unit at Sangli will be operated on lease for six years.

The company is dependent on refining raw sugar imported under advance licence. International raw sugar prices have been firm this year and can adversely affect the margin. Moreover, next year, the company will have to export large quantity under export obligation (in return for the import of raw sugar effected last year) and international conditions will play a major role in its performance.

The company has not entered into contract with plant/machinery providers for most of its expansion program, delaying the schedule of implementation.

The Uttar Pradesh government has been encouraging substantial capacity expansion in the state by large units by giving various subsidies. This will put units in other states at a disadvantage.

Sugar is a politically-sensitive commodity and subject to whimsical changes in government policies.

The sugar price upcycle has already run most of its course. Though no major fall is expected, no major rise is also expected.

Valuation

Shri Renuka Sugars earned Rs 442.78 crore of sales revenue in the nine months ended June 2005 as compared to Rs 198.01 crore in the corresponding previous period, representing an impressive growth of 125%. The profit before tax and the profit after tax zoomed by 190% and 225% to Rs 37.1 crore and Rs 32.11 crore, respectively, in this period. The growth was mainly powered by the operations of the leasehold sugar unit at Ajara and increased processing of imported raw sugar.

On post-issue equity, EPS on an annualised basis for FY ending September 2005 works out to Rs 17.5 and Rs 18.1 depending on the final issue price and assuming that the green-shoe option is exercised. At the lower price band of Rs 250, the P/E ratio works out to 14.3, and at the higher band of Rs 300, it comes to 16.6. The industry average P/E stands around 13.9. Shri Renuka Sugars's acquisition-led growth model is riskier and its relatively high export obligation on account of raw sugar import is also an irritant